CHICAGO — Ohio State University is coming to market Wednesday with $350 million of bonds that feature a new credit for the state’s leading flagship university.
The debt, backed by so-called student life revenues, will finance construction of dormitories to fulfill the university’s new plan to require all freshmen and sophomores to live on campus by the 2015-2016 school year.
OSU is one of the few public universities — and the largest — to enact the mandatory housing policy, officials said.
Backed by housing, dining and recreational sports facilities fees, the bonds are subordinate to the school’s double-A rated general receipt bonds.
That paves the way for the university to preserve its general receipt pledge for its ongoing $2.2 billion capital plan, according to officials.
“This is a brand-new credit for the university,” said Mike Papadakis, vice president of financial services and treasurer at OSU. “We obviously weighed a lot of options, and we’ve been thinking about this for the last 18 to 24 months. We decided this would give us some additional flexibility with regards to our general receipts bonds rating, given that we still need our capital plan.”
It’s the school’s first new-money deal since 2011, when it became the first public university to issue 100-year bonds. The century bonds featured a single bullet payment in 2111.
That borrowing, and a 2010 Build America Bonds issue with a 2040 bullet maturity, marked a shift away from the university’s conservative tradition of issuing 20-year serial bonds.
This week’s issue is a mix of serial and term bonds.
The serials feature no principal repayment until 2023, and the term bonds come due in 2038 and 2043.
“Our rationale has been that with rates at or near all-time lows, it’s a good time to lock in long-term rates,” said Papadakis, a former investment banker with Keybank Capital Markets who joined OSU in June 2011.
The debt is fixed rate, in keeping with the school’s recent efforts to reduce its variable-rate debt, which now makes up 20% of its portfolio.
Papadakis said the team decided to delay principal payments for the first 10 years to give time for the student life revenues to grow.
“Over the last three to five years we’ve spent a lot of money on student life,” he said, referring to a new student union, a recreational sports center, and updated libraries and residence halls. “Once we’re done with this, we’re set for student life for the next decade or so, and we wanted to give time for the revenue streams to ramp up.”
Moody’s Investors Service analysts rate the special-purpose general receipts bonds Aa2, a notch below its Aa1 rating on the university’s general receipts bonds.
Standard & Poor’s rates the debt AA-minus, and rates the school’s outstanding general receipts bonds AA.
Both agencies maintain stable outlooks on the university.
The housing plan is called the North Residential District Transformation. Proceeds will increase student beds to nearly 14,000 from just under 10,000.
A year of housing costs roughly $9,000. The plan includes a $2,000 stipend that students can use for various purposes, including study abroad programs.
Ohio State University officials believe that requiring all freshmen and sophomores to live on campus will lead to stronger academic results, a greater engagement with the university, and a “greater appreciation for diversity,” according to preliminary bond documents.
Special purpose revenues in 2012 totaled $137 million. Based on that figure, maximum annual debt-service coverage should total 5.4 times, according to the university.
The project carries a $396 million price tag, of which $350 million is covered by this week’s borrowing and the remainder from internal funds.
OSU opted for subordinate special purpose bonds in part because it has taken on significant amount of debt over the last few years — its debt has nearly doubled since 2008 to $2.74 billion of total, according to S&P.
Bond proceeds have been used to finance the five-year $2.2 billion capital campaign, which ends in 2015. It includes a $1.1 billion expansion of the OSU Medical Center, one of the largest construction projects in the state.
The university so far has issued $1.3 billion of the debt. It plans to issue a final $300 million piece in 2014.
The rest of the money for the project will come from various sources, including fundraising.
Credit analysts view OSU as a strong credit with a history of healthy operating performances and a solid market position.
However, both Moody’s and Standard & Poor’s noted the recent ramp-up of debt and the longer-term bullet maturities in the portfolio.
“The effect of this change is a longer average life on the university’s debt portfolio and an increased need to manage internally to prepare for payment of these bonds as they become due,” Moody’s analyst Edith Behr wrote in the ratings report. “The current management of the university exhibits expertise and a focused attention on planning for these eventualities.”
A credit positive is that the school annually builds its reserves to pay debt service.
“Any move away from this practice would be a credit negative,” according to Moody’s.
Standard & Poor’s credit analyst Ken Rodgers warns that the university’s recent “use of a more complex debt structure” could pose a challenge if it continues to borrow at the same pace and the market turns volatile.
Another challenge comes from OSU’s growing reliance on health care, which generated 47% of total revenues in fiscal 2012.
The dependence could become a problem if health care revenue begins to decline or if the pending federal health care law negatively affects the medical center, analysts said.
“In addition, we believe that for an institution that is approaching $5 billion in revenue and is the size and complexity of OSU, as well as the plethora of laws, regulations and rules it must abide by, an occasional unexpected development could negatively reflect on the university and potentially affect its credit quality,” Rodgers wrote.
Papadakis said the school is trimming medical center costs and keeping a close eye on the impact of federal health care reform.
“We’ve been highly focused on that over the last 24 months and have been working with consultants,” he said, adding that they have identified $100 million to cut out of the system over the next few years. “Overall things are looking very good at the medical center, but we’re cognizant of what’s going on and trying to get laser focused on costs.”
Papadakis did not rule out the possibility of a merger or acquisition for the medical center, a move that many health care facilities are opting for to help prepare for the new landscape starting in 2014.
Barclays is lead manager on the deal. RBC Capital Markets, Loop Capital Markets and PNC Capital Markets LLC round out the team. Bricker & Eckler LLP serves as bond counsel.